Imagining Future Losses: Operationalising the IFRS 9 Expected Credit Loss Approach

Department : Accounting and Management Control

Speaker : By Professor Omiros GEORGIOU from University of Birmingham

Room : V Ramanantsoa

Abstract
Accounting standards for loan loss provisioning have been shifted to a more forward-looking
approach based on expected losses. The reasoning underlying both the standard setter’s
expected credit loss (ECL) approach and much of the existing relevant literature appears to
underestimate the inherent unknowability of the future and the need for imagination to tackle
this. This issue is explored here through empirical evidence from interviews with preparers of
bank financial statements and the notions of ‘fictional expectations’ and ‘imaginaries’ (Beckert,
2016; Beckert & Bronk, 2018) which enable us to conceptualise credit loss expectations as
contingent constructions rather than merely probabilistic assessments of future outcomes. We
discover that fictionality is ubiquitous in the estimation of ECLs largely through scenario
analysis and proprietary modelling that involve calculations and contingencies which challenge
the apparent objectivity of forecasts. We also discover how this fictionality contributes to a
compliance mindset in which credibility becomes more important than precision, renders
provisions open to manipulation, and reproduces, rather than reduces uncertainty largely
through the introduction of model risk. Overall, our analysis reveals the importance of
imagination in the production of reported numbers and what this implies for our understandings
of the operationalisation of IFRSs.